Hello IBM Watson

We hear about the IBM Watson everywhere. It began with Watson winning Jeopardy in 2011, then the message and the technology behind has been pollished to now being commercially viable both as strategy, technology, marketing, and now also as a busienss.

The IBM story that led to IBM Watson

Let’s start with a little flashback. Generally IBM is perceived as best (only) suitable for large and bulky corporations. It is in fact a very true reality-based picture. IBM, however, has driven innovation in a way that few other companies have. Fluffy concepts that few have understood have after a few years become a reality, and IBM has rarely received any credit for it, despite the fact that they pushed much of the early innovation and research in the field. Terms such as e-business and on-demand were both coined by IBM. IBM has had its fingers in most big shifts in technology over the years.

It began with the tabulating machines and punched cards. The tabulating machines and punched cards are kind of the first computer ever made.

Programmable systems. IBM with their computers and their databases, programming languages and operating systems have helped to create this era, it is quite natural. It was IBM who introduced the magnetic hard drive, DRAM, etc., etc., but also the relational database in 1970 and that they actively contributed to several programming languages.

There are of course several other companies that have affected the industry over the years, but I argue that no other company has done it the same way as IBM. Today, IBM is the world’s largest IT company (usually # 1, but it shifts between IBM and HP). IBM has about 400,000 employees and are in the leading position in most areas they operate in.

The toughest time for IBM was during the 1990s, when IBM was very heavy and was stuck in history. Some of the same challenges we see that IBM have today.

IBM today

The share price today is the lowest in five years, analysts thrashes quarterly reports and the future success is constantly questioned. Is IBM a dead horse?

I’m not an analyst and do not want to be either, but in my world, the stock market is a rigged game, it is financial models more than if companies are doing well or not. IBM is the only listed share I own and I doubled up my little possession as late as last week. Why? Well, I believe in IBM and I think Watson is a big part of IBM’s future success.

IBM suffer from being big (big blue) and have been around for over 100 years, although the IBM name came first in 1924. It all started when Charles Flint merged together four companies, and in 1911 Thomas J. Watson, Sr. became General Manager of CTR, IBM name at that time.

This allows IBM to drag on a lot of legacy. It’s almost a little scary when you read in the business press and comments from analysts that IBM is a hardware company. It was a very long time ago IBM had hardware that some kind of core business and today it is just over 10% of revenue coming from hardware and margins I guess are at a minimum, which IBM realized in time and sold off most to Lenovo. The cash-cow mainframe is kept and doing very well as far as I have understood.

Why are the analysts wrong?

IBM is today in terms of sales about 50% Consulting, 35% Software, the rest is small numbers. What should worry the analysts, if one should find something to complain about, is that the kind of consultants that IBM is offering is moving toward decreasing demand in a world where companies buy more and more SaaS solutions, those solutions are not in need of lots of consultants in nice suits for extremely expensive hourly rates. Sure, I generalize, but the fact is that the demand decreases, and right from the start, consulting is no high-margin product, so personally, I see a transformation like Lou Gerstner did, when he shifted from hardware to consulting 15 years ago. For those interested, his book “Who says elephants can’t dance” is a really good read about that transformation.

Just to be clear, both GBS and GTS have a lot of geat offerings which are still very valuable and affordable for customers including outsourcing. It is the actual hourly consulting I refer to.

Software, on the other hand, is about 80% margin (GP Margin 3Q15 was up 86.4%). Software is the new black, but there are clouds in the sky, the license-model that IBM offers are from the stonesge. IBM’s licensing model is based on selling large volumes at discounted price (this is strucutred in a system, called Passport Advantage) and with volumes the customer can grow with, that they do not need now, but maybe in the future, aka the shelfware. In Sweden (that I now have retured to after 3 years in southeast asia), I would guess that these transactions corresponds to approximately 80% of the revenue and only comes from about 20 customers (maybe should have added a “Hello ELA” in the title). It is not the future!

IBM have had the SMB sector as a major focus for about 10 years now, unfortunately, it is nice words than operational reality, IBM goes where the money is and in their case that is the big corporations. Even here I think that Watson will be able to bring a change, both in the business model as well as he products.

Since I wrote above from the top of my head, I felt that it might be worth checking facts about the numbers, so I checked the IBM 3Q15 earnings presentation from October 19, and my numbers correspond well with the 3Q15 earnings numbers. It again illustrates my skepticism towards the stock market. The overall profit margin for IBM is impressive 50%, it’s a pretty nice margin. If you move to higher margin products which require less human effort and away from products that generate the most revenue (hour-based-consultants and hardware) it will increase margin but sales go down, why do not the analysts see this, but what do I know, I’m just thinking logical and that is the opposite of the stock market.

But are the analysts right after all? Oh no, they’re wrong, I say optimistic, but there are some challenges? A look at their product portfolio and ignore the different IBM divisions, one sees quickly that IBM must manage to turn its business model and its products to the cloud and valuebased subscription models. Sounds buzzwordy, but it is crass. With competitors in the cloud as Amazon, but also Google, Microsoft and Salesforce et al. Personally, I think that this particular infrastructural change in terms of the cloud, will be the toughest challenge of them all for IBM.

With the above in the rearview mirror, I’m very happy to see the intense focus IBM management has on Watson. Every time IBM CEO and Chairman Ginni Rometty speaks she always mention Watson, and when you see Ginny it really feels that she is passionate and sincerely believe in Watson and its development.

Watson is not a temporary marketing fix, it is IBM’s future, or at least a very important component in IBM’s future.

My personal opinion is that she invests her name, her success as well as IBMs in the success of Watson. I believe Watson to be the single most important part of IBM to be successful long-term.

Why is Watson so important to IBM?

Why this exposition on the share price, turnover, success with cloud etc? What does that have to do with IBM Watson? Well, Watson represents a new era in technology, so if we link together IBM’s history with this new era, the cognitive era, this picture is very simple and descriptive about the different periods we had and the one we are now entering.

But it is not just by what Watson can do in cognitive analysis, but also the business model. Watson lives in the cloud, has an extremely flexible and adaptable business model and that Watson is not only aimed at large companies, but also for startups and others. For me Watson represents IBM’s future at all levels.

Watson’s success will be based on Watson’s part in other companies products and that requires a good genetic price / licensing model, and that services are available in the cloud. There we have a future for IBM that I believe in.

This post was intended as a “Hello World”-post in terms of Watson, but now when I have written it, it should rather act as a philosophical baseline of my attitude towards IBM and its future. I have a few upcoming posts on the topic and those will guaranteed be more related to Watson. It all sticks together though since Watson is IBM’s future. IBM Watson Group with about 2,000 employees has now existed for almost 2 years, the recently founded a consulting unit of GBS, IBM Cognitive Business Solutions, with about 2000 consultants who solely will work with cognitive and further 25,000 IBMers are to be trained in the field this autumn, over time all IBMers will most probably get their fair share of Watson.